Apple Buys Chip Maker - What’s Up?

by Sachin Balagopalan on April 23, 2008 · Comments

Lot of speculation on the blogosphere today about Apple’s acquisition of chip maker PA Semi for $278 million in cash. The obvious reason is of-course the iPhone.

The decision to center the iPhone design around a chip that Apple could own marks a significant strategic choice by Apple Chief Executive Steve Jobs, and is aimed at ensuring Apple can continue to differentiate its flagship phone as a raft of competitors flood the market. According to a source affiliated with the chip company, Jobs and Senior Vice President Tony Fadell led the tiny group of executives who spearheaded the acquisition, which included negotiations that took place in Jobs’ home.

Couple of things popped up right away as I read the Forbes report. Job’s & Co are clearly aware of the competition and that of-course is inevitable when you have a hot product like the iPhone. He doesn’t want to lose that competitive edge and having control over core components is one way to ensure that. The Forbes article also says…

Few in the high-tech world are as wary as Jobs of turning control of core components over to a partner. The PC industry has been his proving ground; over the past three decades, he has watched numerous PC makers that have built their products around Intel’s microprocessors wind up in fierce battles for narrower and narrower profit margins.

I think that’s a valid point - why share profits with third party component manufacturers when you can have your own. However I think the $278 million investment in PA Semi goes beyond that and I mean literally. IMO Jobs is looking beyond the iPhone and I think the bigger goal is to drive and perhaps control the chip industry which so far has been dominated by Intel. The real investment is in the intellectual property including the brains of Dan Dobberpuhl (the founder) and his staff of engineers. These guys are innovators and their track record attests to that. So with that kind of talent Jobs is now potentially in a position to dictate the future direction of the chip industry by innovating and coming out with cutting edge technology like the low-power chip.

I think this is a long term strategy contrary to popular belief they are going to replace the chips in their existing line of products including the iPhone. Nevertheless this will in interesting to watch.

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